Beruflich Dokumente
Kultur Dokumente
An Indian Perspective
Rohit Agarwal
(e-mail: rohit@rohit-agarwal.com)
Abstract
This paper explores the Private Investment in Public Equity as a strategy used by Private Equity Investors. The paper evaluates
the future prospects of this instrument in the country, and takes into consideration the rising arguments that question the
sustainability of the investment in listed equities in a private equity context.
The paper is based upon desktop research, and draws heavily upon public data and information available in various journals
and online resources. The paper also quotes a large number of fund managers, General Partners (GPs), Limited Partners (LPs)
and Private Equity investors and takes into account their views on PIPEs in India and the Asia-pacific region. A list of references
has been provided in the end stating the sources in order of appearances in the text.
Structured PIPEs: Who are the Investors and what are their objectives
of investing in PIPEs?
Structure PIPE deals involve sale of convertible
securities, which could either be convertible preferred A large number of PE funds and Hedge funds have
stock or convertible debentures. In either of the two come into existence in the recent past. These include
cases the investor can convert them to common stock funds formed by private money managers, investment
at the conversion price. The conversion price in such a advisory firms and also funds that are surrogates of the
case is not fixed and is dependent on several variables major investment banks such as Goldman Sachs, Citi,
that adjust the conversion price as per the market UBS and Credit Suisse etc.
price. In case the market price of the company’s
common stock falls below the existing conversion price There are no constraints that limit the investment
the conversion price will be adjusted to a lower price criteria of any of the hedge funds or PE funds. But in
level. Structured PIPEs are good for its investors since most case PE funds have a specific focus on a particular
they provide price protection but at the same time industry sector like healthcare, TMT (Technology
they induce a risk of substantial dilution to the Media and Telecommunications), real estate etc. Such
company’s common stockholder. focus helps fund managers to develop domain
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expertise and better understand the future prospects The other major class of investors in the PIPE segment
of the company’s business. It has been observed that is the conventional private placement investors who
investments backed by a solid understanding of the focus on a long term investment perspective. Their
industry are more likely to yield better returns as investment decisions will not be based upon technical
compared to more scattered investment portfolios. aspects such as market liquidity or trade volumes. They
The focus need not be restricted in terms of industry are more likely to carry out extensive and independent
but can also be on specific geographies, such as Latin research and due diligence about the prospect deal.
America, Asia-Pacific, Europe etc. Several investors This research is very likely to be based upon the
may choose to impose restrictions based on various current and future prospects of the underlying
criteria such as minimum required share price, business.
companies with strictly positive NPV of future
expected cash flows etc. The Indian PIPE market
Additionally specific PIPE investments are sold and The concept of PIPEs has always been a point of
distributed to a large pool of investors. The target debate in India’s General Partner (GP) and Limited
investors are based upon the kind of the PIPE Partner (LP) community, with the number of
Transaction (i.e. pure or standard, traditional or supporters for the strategy varying in accordance to
structured), the market size of the company including the performance of the equity markets.
several other factors.
During the time period from January 2008, the time
Traditionally, PIPEs were usually sold to sophisticated when the SENSEX stood at an all-time high of more
investors who considered not only fundamentals of the than 21,000 points, up to October 2008, when the
firm but also looked at the technical trends of the markets dipped to sub 7,700 levels, critics had an
market forces such as trade volumes, volatility and opportunistic period to portray GPs who relied on
investor sentiments etc. They were not interested in PIPEs as a core investment philosophy as imprudent.
becoming a part of the board of directors nor do they
However the scenario is quite different now; the
seek for special rights apart for their right to resale
SENSEX stands at a healthy 17,900 levels, making a
registration. Very few of these transactions used to
significant increase in excess of 100% from the lows of
involve traditional PE investors, however lately a
October 2008. Fund managers with a focus on PIPEs as
growing number of VC and PE firms have made
a part of their investment portfolios stand on much
investments in these PIPE deals.
greener grass as the underlying valuations continue to
Even though majority of these transactions are rise. Seeking advantage of the subsequent drop and
structured in a rather simple and straight-forward rise in valuations, firms like ChrysCapital have become
manner, it is quite common for VC investors to try and more active in this domain.
alter to the PIPE arena to enjoy full blown rights and
During March 2007 Norwest Venture Partners (NVP)
protections that they typically seek with respect to
made its first ever investment in a publicly listed Indian
private company preferred stock investments. It is very
company by acquiring a stake of around 5% in the
likely that such VC PIPE transaction will raise numerous
telecom service provider OnMobile. The deal was
concerns under the national securities laws
worth around $15Mn (Rs. 77Cr). Later it made another
(Securities Contracts (Regulation) Act), and corporate
investment in Shriram City Union Finance (SCUF) in July
governance regulations.
for around 8% of the company’s stake.
A number of PIPE investors make their investment
Sequoia Capital India has also made a couple of
decisions based on the company’s liquidity levels, e.g.
investments in Indian equities after the markets had
they take into consideration the daily trade volumes on
bottomed out. One of its recent PIPE deal was the
the company’s equity stock. Such investors usually
acquisition of a 6% stake in eClerx, a knowledge
have a limited time horizon to their investments and
process outsourcing (KPO) firm.
their investment decisions are not long-term oriented.
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Furthermore, in the first six months of 2009, PIPE about, to be honest: there’s the increased dependency
investments stood as high as 20% of the total on movements in the public market to generate
investments of PE firms in India in terms of value, up returns, and the fact that it is difficult for legal and
from 15% in 2008. PIPE investment grew not only in regulatory reasons to structure the same levels of
value but also in volumes. PIPE transactions as a downside protection than you can in a private
percentage of all PE deals rose from 15.6% in 2008 to transaction.”
about 23% in the half of 2009 (Source: Venture
Intelligence). He states that all conditions being same, “there are
other ways to get more bang for your buck as an
investor than by paying 2-and-20 fees for what is
PIPEs as a percentage of essentially a long-only public equities fund”.
total number of deals
Indian companies like to list and they list early Also there have been LPs who never questioned PIPEs
as a favorable strategy in PE investments. A large
As stated by most of the GPs, there aren’t too many section of LPs who were relatively new to Asian
investment opportunities in unlisted India companies, markets and were seeking investment opportunities
the primary reason being the fact that Indian during 2007-08 bought into the PIPE game. Mr. Low
companies usually file for public listing much earlier says “Some GPs had the numbers to prove their thesis
than their European ant other foreign counterparts. that PIPEs were the way to the best returns in the
This fact further reinforces the GPs decision to Indian market.”
consider investment in PIPEs as a better alternative.
People in the PE business are not very surprised by the
Mr. Wen Tan believes that this is one major reason for popularity of PIPEs in the Asian and especially Indian
the trend towards PIPE to continue. “There are markets. This is so due a couple of reasons. Firstly,
proportionately fewer large-cap businesses which are PIPEs provide LPs and fund managers with greater
still private and – given that some GPs have been liquidity as compared to the traditional PE investments
raising sizeable funds – it is highly likely that the in unlisted equities. Secondly and more importantly
relative lack of large-cap private investment Asian public equities have consistently outperformed
opportunities will result in some of the available Asian Private Equities in terms of returns generated for
private equity capital spilling over into the public the LPs after factoring the leverage used in the deal.
markets,” he says. Mr. Wen Tan says “This is important since levered PE
deals may generate better numbers, but they come
PIPEs as a trend are not limited to India, the
with more risk.”
phenomena is quite prominent throughout the entire
Asian region. Mr. Tan states that published figures for Considering the strong growth the Indian equity
the last quarter indicate that PIPEs are the largest markets are witnessing and the fact that Indian
single sub-segment of the PE market in each of China, companies continue to get listed much before their
India and Southeast Asia. foreign counterparts, the picture looks bright for PIPEs
as a strategy in PE investments. It seems that going
Furthermore, there is a firm belief amongst many
forward the interest in PIPE transactions in the GP
players in the PE industry that PIPE investments have
community will continue its rise upward. What remains
worked in India. Managers such as ChrysCapital, who
to be seen is how well the GP community succeeds to
have sustained a large inclination towards investments
instill confidence amongst LPs towards PIPE
in listed equities, have produced returns that justify
investments.
their strategy.
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References:
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